Scottish private sector activity fell at the end of the year, although the Royal Bank of Scotland's Business Activity Index improved from November's recent low of 43.9 to 48.3 in December; the softest downturn in activity in the current five-month sequence of reduction.
Similarly, while new work received fell strongly in December, the pace of decrease was softer than that recorded in the previous survey period.
However, the ongoing drop in business requirements amid challenging demand conditions resulted in the first fall in employment in 21 months. Moreover, as backlogs of work continued to decrease and expectations moderated further.
Demand shortfalls continued to lead a decrease in new work received across Scotland's private sector in December, thereby extending the run of contraction to six successive months. The cost of living crisis, higher interest rates and growing economic uncertainty were all linked to the loss in client appetite.
Moreover, the downturn in incoming new business across Scotland was stronger than that recorded at the UK-level.
Sentiment across the Scottish private sector ticked down for the second month running during December. The latest reading was the second weakest in 31 months and comfortably below the historical average. The war in Ukraine, a slowdown in the housing market and inflation weighed heavily on confidence.
Of the 12 monitored regions, Scotland had the third-lowest Future Activity Index reading, ahead of Northern Ireland and the north east of England.
The latest RBS data signalled a fall in employment across Scotland during December, thereby ending the run of uninterrupted growth that began in April 2021. This was driven by lower staffing levels reported at service providers, as goods producers posted another slight rise in headcounts.
The pace of job shedding across Scotland was slightly faster than the UK average, which similarly reported a fall in payroll numbers for the first time in 22 months.
As has been the case since June, levels of unfinished work fell across Scotland during December. Surveyed businesses reported that as the pipeline of new work was eroded, they were able to work through backlogs.
The pace of contraction across Scotland was in line with that recorded for the UK as a whole.
Companies in Scotland registered another substantial incline in average cost burdens during December, thereby stretching the current run of inflation to 31 months. While the pace of incline was the softest in 18 months, it registered well above the pre-Covid average. An array of reasons was attributed to the latest incline, including higher wages, inflation, the ongoing energy crisis and Brexit.
Price pressures, while elevated, were still weaker across Scotland than that seen across the UK as a whole.
Prices charged for the provision of goods and services rose for the twenty sixth successive month during December, with Scottish firms keen to share cost burdens with clients. The pace of charge inflation eased from November to the softest in three months, but was still among the highest on record.
Judith Cruickshank, chair of the Scotland board at RBS, commented: "The Scottish private sector recorded another grim performance during December - client appetite suffered as various economic headwinds continued to dominate the business environment.
"Moreover, the loss in demand helped to relieve price pressures, with slower rates of inflation seen for both input costs and output charges.
"As we move into 2023, it will be important as to how firms adjust to demand shortfalls," she continued, adding: "We have already noticed the first reduction in employment since March 2021.
"Amid a high inflation and interest rate environment, it will be difficult to revive demand and thus will be the primary concern for businesses."
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